The plowback ratio shows the percentage of net income that a firm retains for future growth. It is calculated by dividing the retained earnings by the net income. The retention ratio, on the other hand, shows the percentage of earnings that are retained and not paid out as dividends, and the sum of the plowback ratio and the retention ratio equals 1 or 100%. The other options are incorrect.

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The Plowback Ratio

Question 299

Multiple Choice

The plowback ratio:

A) Is equal to net income divided by the change in total equity.
B) Shows the percentage of net income available to the ﬁrm for future growth.
C) Plus the retention ratio must equal 100 percent.
D) Is equal to the change in retained earnings divided by the dividends paid.
E) Represents the earnings returned to the shareholders.

Correct Answer: